Often the costs of loans can be enough to put us off getting them. There is a financial cost to many of the things that we do though and therefore we will usually accept that we will have to pay to borrow. However, the costs of loans vary a lot and people do worry about taking on a loan that is more costly. It is worth understanding about costs of loans though and how the costing works. This should allow you to better understand the differences between costs of loans and it will also help you to calculate the costs so you can make the right decision when choosing a loan.

What determines the cost of a loan?

The cost of bad credit loans will be set by the lender and it can be easy to think that they higher cost loans are all about the lender making more profit. In some cases this could be true but there are different reasons for setting costs at the levels they are.

  • Admin charges – there will always be an administration charge for setting up a loan. It needs a person to check the applicant’s details and put all of the processes in place such as setting up direct debits and checking ID so that the loan can go ahead. This is something which every lender will need to do and some will charge a separate administration fee but others will incorporate it into their interest rate. If you have a mortgage, for example, the administration fee can be spread over decades so it is very small but if you have a payday loan, lasting a few weeks that charge has to be repaid in one go. It can therefore seem more expensive when it could actually be cheaper.
  • Borrowing charges – the lender will have to pay to borrow the money that they then lend to you. Conventionally banks use money that people have saved to pay out, so they need enough to pay interest on those savings, but they tend to also borrow from elsewhere and they need to cover the cost of that borrowing.
  • Staff costs – all lenders need staff to do all sorts of jobs including customer service which need to be paid. If you want to be able to have your questions answered by someone or have your loan account opened quickly then there needs to be lots of staff available to do this for you.
  • Risk costs – a lender takes a risk when they are lending money as some of the people, they lend to may never repay their loans. They have to make sure that they do not go bankrupt as a result of this and therefore charge a bit extra so that they have money to cover this risk.

These are just some of the costs of being a lender but it can help to see where your money goes and why loans can be expensive.

How to calculate the cost of a loan

It is really important to make sure that you know exactly what the loan that you are taking out will cost you. It can be easy to make assumptions about which types of loans will be most costly, but unless you actually work it out you will not know. Looking at the interest rates can make you think that a mortgage will be the cheapest loan and an unauthorised overdraft the dearest but if you look in monetary terms rather than interest percentage you will get a completely different perception.

For example, lets assume you are paying £100 a month in interest on your mortgage and you have that mortgage for 20 years, that adds up to £24,000 in interest alone. Most people pay more interest than that and for longer as well, so they pay a lot of money for that loan. However, there are many advantages in owning a home so they would argue it was good value for money. Compare that to a credit card where you might be paying £30 in interest a month then the cost of that will be less, especially if you pay it back more quickly. However, you need to decide whether you think that the loan is giving you good value for money.

It is also important to make sure that you include all costs of the loan. Just looking at interest rates will not be enough as it may not include other charges which are added on as well. The AER percentage will give you the equivalent interest rate including any additional fees, but if you do not have that figure then get in touch with the lender. They should be able to let you know how much the loan will cost and that will allow you to be able to compare the costs of different types of loans.

How much are payday loans?

For a payday loan you should be able to ask the lender what the cost will be but there is often a calculator on the website so that you can work it out for yourself. You will often just be able to put in the amount that you wish to borrow and how long for and it will let you know how much you will need to repay in full. You will then just need to take away the amount that you borrowed from this figure and that will tell you how much it costs. You will be able to do this with different payday loans and that will enable you to compare them on cost.

It is worth noting though that the costs could go up. This should not happen due to interest rate changes or the lenders policy changes but if you do not repay the loan when necessary. Like all loans, there will be fees to pay if you do not repay the loan on time and this will make the loan more expensive. These fees vary between lenders and so if you think that there is a chance that you will not repay on time, then take a look at these charges as well so that you have an idea of how much extra you may have to pay and how the amounts vary between lenders.

The whole concept of lending can be really confusing and often there are stories in the news or other media which can add to that confusing. We may have heard that you can get loans with a poor credit record then that all lenders have to do credit checks and you may just wonder whether there are actually no credit loans in existence any more. It is worth getting to know exactly what is going on currently with loans and particularly no credit loans so that you are aware of what your options are.

What are no credit check loans?

You may have seen that there are some loans which advertise themselves as no credit check loans, but there are laws in place that credit checks have to be done. It can be extremely confusing. A loan which says it does no credit check will tend not to turn down many applicants based on their credit rating. A credit check just gives the lender an impression of your financial situation. The lenders then can choose who they decide to lend to and who they don’t. Large financial institutions will tend to be quite strict and only lend to those that they feel will be guaranteed to repay their loans and therefore they will turn down those that do not have a good credit record. Other lenders will not have such high standards and will be happy to lend to most people as long as they have an income so have a capability of being able to repay. A no credit check loan will tend to fit into this category of loan.

Do no credit check loans exist?

Therefore, it is not really the case that there are no credit check loans, but there are loans where your credit rating is not that important to the lender. This could be seen as the same thing and it does mean that you do not need to despair if your credit rating is not good. There will be something that you can do as there are loans available that could provide you with what you need.

Are there borrowing options for those with a poor credit record

This means that if you do have a poor credit rating then there will be some borrowing options available to you. These will often be short-term loans where you will borrow a fairly small amount fo money. This makes sense as the lender will want to make sure that the loan is an amount that you can cope with. If you have not had loans before or have struggled with repayments then this will have a negative impact on your credit score. They will therefore want to make sure that you are not going t be overwhelmed by the loan that they give you. Therefore, it will tend to be for a smaller amount of money that they will hope you will be able to manage well. You may find that once you have used a lender once, they will be prepared to lend you more money. This will generally only be the case if you repay the loan as agreed and they will then be able to trust that you will be able to do that again in the future.

With all loans it is wise to be careful. You will need to be sure that you will be able to cover the repayments or else you could end up having to repay a lot more or even go to court. Therefore, taking on a smaller loan like this, can be better as it will be easier for you to manage and there is a much lower chance that you will get into difficulties. If you have never borrowed before then you will not know how easy you will find it to manage loan repayments until you try. If you have struggled in the past then you will appreciate the possible problems and will know that if you borrow less it will be easier for you.

It is worth therefore, making sure that you carefully calculate how much will be the right amount for you to borrow. Think about not only how much money you think you need, but also how much you can afford to repay. You need to make sure that you will definitely be able to make that repayment in full and that is the most important thing that you should be focusing on. You will also need to make sure that you will be able to pay for everything else that you need to buy as well. So, get some bank statements together and calculate what you have to pay for and how much money you have coming in and make sure that you can afford it. If not, then it could be possible to cut back spending or earn more money but you will need to come up with a plan before you take out the loan.